Applying 415 limit to a Profit Sharing contribution in a 401(k) plan -

[John A]

Okay, I'd like a little help with the very basics of applying the Section 415 limit to profit sharing contributions in a 401(k) plan.

A 401(k) plan provides for deferrals up to 15% and a match that can be up to 6%. One NHCE defers 15% and gets the 6% match. The plan sponsor wants to make a 10% profit sharing contribution.

1. Can the plan sponsor make the full 10% contribution and return deferrals to the NHCE (whether the NHCE wants the deferrals returned or not) to satisy 415?

2. If the plan sponsor decides early enough in the year that it will make a 10% profit sharing contribution, can it limit all NHCE deferrals during the year in anticipation of the 415 limit to something below the limit set by the plan?

3. Stupid Question: Can the plan sponsor contribute 10% to everyone but the NHCE and contribute 4% profit sharing for the NHCE?

4. In general, how is a situation like this handled (other than by telling the plan sponsor that it might be wise to redesign the plan)?

5. Is there any type of official guidance that would prevent this type of plan design?

Thanks!

[Guest Judy Miller]

The plan will govern how this situation is resolved. Most plans would provide that the full discretionary contribution is allocated, then the elective deferrals returned to the extent necessary to satisfy 415. However, some plans limit the allocation of the discretionary contribution, resulting in the allocation you described in 3.

The employer could (paragraph 2.) announce the profit share and give participants the opportunity to reduce deferrals. If there is an hours or end of year employment requirement attached to receiving the employer profit sharing contribution, the NHCE in question may prefer risking a reversion to not maximizing deferrals, though.

As long as there is no problem with the deductible limit, I don't think this is much of a problem. The reversion is a bit of trouble, but no harm done to anyone.